On appeal from the United States District Court for the Middle District of Pennsylvania, D.C. Civil No. 86-1380.
Gibbons, Chief Judge, Seitz and Hutchinson, Circuit Judges.
Plaintiffs Equitable Gas Company (Equitable) and Kentucky West Virginia Gas Company (Kentucky West) appeal from that portion of an order of the district court denying them prejudgment interest. Defendant Pennsylvania Public Utility Commission (PUC) cross-appeals from that portion of the same order finding the Pennsylvania Act of May 31, 1984, No. 1984-74, 66 Pa. Con. Stat. Ann. §§ 1307(f), 1317-18 (West Supp. 1988) (Act 74) unconstitutional as applied to Equitable and Kentucky West.*fn1 The district court had jurisdiction under 28 U.S.C. § 1331. We have jurisdiction under 28 U.S.C. § 1291.
Plaintiff Equitable is a retail distributor of natural gas. It purchases natural gas from several wholesale suppliers including its affiliate, plaintiff Kentucky West an interstate natural gas pipeline company. Kentucky West sells natural gas wholesale to Equitable under a long-term contract approved by the Federal Energy Regulatory Commission (FERC) under the provisions of the Natural Gas Act, 15 U.S.C. §§ 717c-717d (1982). The contract entitles Equitable to receive from Kentucky West a fixed amount of natural gas each day.*fn2 The contract between Equitable and Kentucky West also contains a minimum bill provision requiring Equitable to pay for a percentage of its contract entitlement under Kentucky West's FERC-approved rate schedule regardless of whether Equitable actually needs or wants the gas. Thus, Equitable is subject to a monthly minimum bill obligation that reflects its contract entitlement. See Kentucky West Virginia Gas v. Pennsylvania Public Utility Commission, 837 F.2d 600, 609 10 n.7. (3d Cir.) (Kentucky West I), cert. denied, 488 U.S. 941, 57 U.S.L.W. 3333, 102 L. Ed. 2d 355, 109 S. Ct. 365 (U.S. Nov. 8, 1988) (No. 88-94).
The Natural Gas Act allows the states to regulate retail natural gas rates. Equitable's retail rates in Pennsylvania are regulated by the defendant PUC. Equitable also has retail customers in West Virginia, and its retail sales in that state are regulated by the West Virginia Public Service Commission.
Pennsylvania's Act 74 provides for the adjustment of retail natural gas rates in accordance with a "least cost" fuel procurement policy. Under the mechanism established by the Act, the utility first files a proposed tariff with the PUC. The PUC is then authorized to conduct an investigation of the proposed retail rate change. PUC review is both forward- and backward-looking: In accordance with the least-cost principles set forth in the statute, see 66 Pa. Con. Stat. Ann. § 1318, the PUC determines what portion of the utility's estimate of gas costs for the upcoming period should be allowed. The PUC also reconciles the utility's actual cost experience during the previous period with the estimated costs that were the basis for the retail rate charged during that period. The utility must refund to its customers any revenues collected which exceed actual gas expenses incurred consistent with the least cost procurement policy, and can recover from its customers any amount by which actual gas expenses incurred consistent with least-cost principles exceeded revenues. This adjustment -- whether a refund of an overcollection or a recovery of an undercollection -- is included in the retail rate that is set for the upcoming period.
The Act also provides that "refunds to patrons shall be made with interest . . . during the period or periods for which the commission orders refunds." Id. at § 1307(f)(5). The Act is silent as to the payment of interest to the utility on undercollections from its customers. PUC regulations, however, provide that "interest shall not be permitted on net undercollections caused by the setting of rates under 66 Pa. C.S. § 1307(f)." 52 Pa. Code § 53.64(i)(3).*fn3
This case presents the plaintiffs' second constitutional challenge to Act 74. In Kentucky West I, 837 F.2d 600, we rejected a facial challenge to Act 74 under the supremacy and commerce clauses of the United States Constitution. We also rejected an as-applied constitutional challenge to a PUC order that disallowed Equitable $14.3 million dollars in FERC-approved costs.
The present case is a challenge to a new PUC order (the Order) issued under Act 74 on August 29, 1986, in response to a proposed rate increase filed by Equitable. In issuing this Order, the PUC anticipated that FERC would approve reductions in Equitable's contract entitlement with Kentucky West.*fn4 A reduction in contract entitlement would have meant a corresponding reduction in Equitable's FERC-approved minimum bill obligation. As a result of its assumption concerning the anticipated reduction in Equitable's contract entitlement, the PUC Order excluded $865,000 in wholesale gas costs from Equitable's retail rates for the ...